nep-mac New Economics Papers
on Macroeconomics
Issue of 2015‒12‒28
ninety-one papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Inflation and Activity – Two Explorations and their Monetary Policy Implications By Olivier Blanchard; Eugenio Cerutti; Lawrence Summers
  2. Self-Oriented Monetary Policy, Global Financial Markets and Excess Volatility of International Capital Flows By Ryan Banerjee; Michael B. Devereux; Giovanni Lombardo
  3. Working through the Distribution: Money in the Short and Long Run By Guillaume Rocheteau; Pierre-Olivier Weill; Tsz-Nga Wong
  4. Uncertainty and Business Cycles: Exogenous Impulse or Endogenous Response? By Sydney C. Ludvigson; Sai Ma; Serena Ng
  5. Money and Output: Friedman and Schwartz Revisited By Michael T. Belongia; Peter N. Ireland
  6. A New Dilemma: Capital Controls and Monetary Policy in Sudden Stop Economies By Michael B. Devereux; Eric R. Young; Changhua Yu
  7. Short-Term Pain for Long-Term Gain: Market Deregulation and Monetary Policy in Small Open Economies By Matteo Cacciatore; Romain Duval; Giuseppe Fiori; Fabio Ghironi
  8. Can the magic of Abenomics succeed? By Evelyne Dourille-Feer
  9. Estimating Time-Varying DSGE Models Using Minimum Distance Methods By Liudas Giraitis; George Kapetanios; Konstantinos Theodoridis; Tony Yates
  10. The Tale of Two Great Crises By Michele Fratianni; Federico Giri
  11. Measuring the Effects of Unconventional Monetary Policy on Asset Prices By Eric T. Swanson
  12. Dynamics of the U.S. Price Distribution By David Berger; Joseph Vavra
  13. Labour force participation, wage rigidities, and inflation By Francesco Nucci; Marianna Riggi
  14. Central bank Credibility Before and After the Crisis By Michael D. Bordo; Pierre L. Siklos
  15. Global Constraints on Central Banking: The Case of Turkey By Ahmet Benlialper; Hasan Cömert
  16. The Time-Varying Correlation between Output and Prices in the United States over 1800 to 2014 By Nikolaos Antonakakis; Rangan Gupta; Aviral K. Tiwari
  17. The Macroeconomic Determinants of the US Term-Strucutre During The Great Moderation By Alessia Paccagnini
  18. Wage-led versus profit-led demand: What have we learned? A Kalecki-Minsky view By Engelbert Stockhammer
  19. The Tail that Wags the Economy: Belief-Driven Business Cycles and Persistent Stagnation By Julian Kozlowski; Laura Veldkamp; Venky Venkateswaran
  20. Agency Business Cycles By Mikhail Golosov; Guido Menzio
  21. Work and Consumption in an Era of Unbalanced Technological Advance By Benjamin M. Friedman
  22. Inflation Targeting Does Not Anchor Inflation Expectations: Evidence from Firms in New Zealand By Saten Kumar; Hassan Afrouzi; Olivier Coibion; Yuriy Gorodnichenko
  23. Forecasting Key US Macroeconomic Variables with a Factor-Augmented Qual VAR By Rangan Gupta; Eric Olson; Mark E. Wohar
  24. A Tractable Model of Indirect Asset Liquidity By Herrenbrueck, Lucas; Geromichalos, Athanasios
  25. World Asset Markets and the Global Financial Cycle By Silvia Miranda-Agrippino; Hélène Rey
  26. Sector Heterogeneity and Credit Market Imperfections in Emerging Markets By Liliana Varela
  27. Obstfeld and Rogoff's International Macro Puzzles: A Quantitative Assessment By Jonathan Eaton; Samuel S. Kortum; Brent Neiman
  28. Measuring trends and cycles in industrial production in Norway 1896-1948 By Jan Tore Klovland
  29. Inequality of Opportunity in Sub-Saharan Africa By Paolo Brunori; Flaviana Palmisano; Vito Peragine
  30. State Anti-Crisis Management of Banking Sector: Looking for Optimization Ways and Contemporary Development Trends By Dudin, Mikhail; Sekerin, Vladimir; Smirnova, Olga; Frolova, Evgenia; Sepiashvili, Ekaterina
  31. Fiscal Analysis is Darned Hard By Eric M. Leeper
  32. Predicting South African Equity Premium using Domestic and Global Economic Policy Uncertainty Indices: Evidence from a Bayesian Graphical Model By Mehmet Balcilar; Rangan Gupta; Mampho P. Modise; John W. Muteba Mwamba
  33. A Time Varying DSGE Model with Financial Frictions By Ana Beatriz Galvão; Liudas Giraitis; George Kapetanios; Katerina Petrova
  34. A New Look at Uncertainty Shocks: Imperfect Information and Misallocation By Tatsuro Senga
  35. Piketty's Book and Macro Models of Wealth Inequality By Mariacristina De Nardi; Giulio Fella; Fang Yang
  36. Credit Frictions and Optimal Monetary Policy By Vasco Cúrdia; Michael Woodford
  37. Mobile Phones in Conflicts of Financial Intermediation By Simplice Asongu; Vanessa Tchamyou
  38. A comment on Wu and Xia (2015), and the case for two-factor Shadow Short Rates By Leo Krippner
  39. Should we still use the concept of potential growth ? By Catherine Mathieu; Henri Sterdyniak
  40. Shocking Language: Understanding the macroeconomic effects of central bank communication By Stephen Hansen; Michael McMahon
  41. Preferential Regulatory Treatment and Banks' Demand for Government Bonds By Bonner, Clemens
  42. The Political Economy of Government Debt By Alberto Alesina; Andrea Passalacqua
  43. Unions, Innovation and Cross-Country Wage Inequality By Chu, Angus C.; Cozzi, Guido; Furukawa, Yuichi
  44. Time-Frequency Relationship between Inflation and Inflation Uncertainty for the U.S.: Evidence from Historical Data By Claudiu T. Albulescu; Aviral Kumar Twari; Stephen M. Miller; Rangan Gupta
  45. Public debt and economic growth: Economic systems matter By Ahlborn, Markus; Schweickert, Rainer
  46. A Bayesian Local Likelihood Method for Modelling Parameter Time Variation in DSGE Models By Ana Beatriz Galvão; Liudas Giraitis; George Kapetanios; Katerina Petrova
  47. Common Currency versus Currency Union: The U.S. Continental Dollar and Denominational Structure, 1775-1776 By Farley Grubb
  48. Collateral Damage? Micro-simulation of transaction cost shocks on the value of central bank collateral. By Rudolf Alvise Lennkh; Florian Walch
  49. Bayesian forecasting with small and medium scale factor-augmented vector autoregressive DSGE models By Stelios D. Bekiros; Alessia Paccagnini
  50. Collateralised liquidity, two-part tariff and settlement coordination By Thomas Nellen
  51. In Search of Ideas: Technological Innovation and Executive Pay Inequality By Carola Frydman; Dimitris Papanikolaou
  52. The Reserve Bank of New Zealand’s output gap indicator suite and its real-time properties By Jed Armstrong
  53. Explaining Consumption Excess Sensitivity with Near-Rationality: Evidence from Large Predetermined Payments By Lorenz Kueng
  54. Reflections on the meaning and measurement of Unobserved Economies: What do we really know about the “Shadow Economy”? By Feige, Edgar L.
  55. "The ECB, the Single Financial Market, and a Revision of the Euro Area Fiscal Rules" By Mario Tonveronachi
  56. Shocking language: Understanding the macroeconomic effects of central bank communication By Hansen, Stephen; McMahon, Michael
  57. IOR – NIER’s Input-Output Model of the Swedish Economy By Forsfält, Tomas; Glans, Erik
  58. Sign Restrictions in Bayesian FaVARs with an Application to Monetary Policy Shocks By Pooyan Amir Ahmadi; Harald Uhlig
  59. Compromiso de Reducción de Emisiones de Gases de Efecto Invernadero: Consecuencias económicas By Andrés Camilo ÁLVAREZ-ESPINOSA; Daniel Alejandro ORDOÑEZ; Alejandro NIETO; William WILLS; German ROMERO; Silvia Liliana CALDERÓN
  60. State Taxes and Spatial Misallocation By Pablo D. Fajgelbaum; Eduardo Morales; Juan Carlos Suárez Serrato; Owen M. Zidar
  61. A History of U.S. Debt Limits By George J. Hall; Thomas J. Sargent
  62. The US Real GNP is Trend-Stationary After All By Tolga Omay; Rangan Gupta; Giovanni Bonaccolto
  63. Does Uncertainty Move the Gold Price? New Evidence from a Nonparametric Causality-in-Quantiles Test By Mehmet Balcilar; Rangan Gupta; Christian Pierdzioch
  64. Training and Search On the Job By Rasmus Lentz; Nicolas Roys
  65. "Redistribution in the Age of Austerity: Evidence from Europe, 2006-13" By Markus P.A. Schneider; Stephen Kinsella; Antoine Godin
  66. The Economic Outlook and Monetary Policy: a speech at the Economic Club of Washington, Washington, D.C., December 2, 2015. By Yellen, Janet L.
  67. Fiscal Shocks in a Two-Sector Open Economy with Endogenous Markups By Olivier CARDI; Romain RESTOUT
  68. Budget Repair Measures: Tough Choices for Australia's Future By George Kudrna; Chung Tran
  69. Where Has All The Skewness Gone? The Decline In High-Growth (Young) Firms In The U.S. By Ryan A. Decker; John Haltiwanger; Ron S. Jarmin; Javier Miranda
  70. Side Effects of War on the US Economy By Farhidi, Faraz
  71. Financial Cycles and Fiscal Cycles By Agustín S. Bénétrix; Philip R. Lane
  72. Firm Dynamics in the Neoclassical Growth Model By Omar Licandro
  73. Is the output growth rate in NIPA a welfare measure? By Jorge Duran; Omar Licandro
  74. Changes in the Return to Skills and the Variance of Unobserved Ability By Guido Matías Cortés; Manuel Hidalgo-Pérez
  75. "Completing the Single Financial Market and New Fiscal Rules for the Euro Area" By Mario Tonveronachi
  76. VARsignR: Estimating VARs using sign restrictions in R By Danne, Christian
  77. The Role of Domestic and Global Economic Policy Uncertainties in Predicting Stock Returns and their Volatility for Hong Kong, Malaysia and South Korea: Evidence from a Nonparametric Causality-in-Quantiles Approach By Mehmet Balcilar; Rangan Gupta; Won Joong Kim; Clement Kyei
  78. Addressing a Root Cause of Sub Saharan Africa’s Poverty Tragedy: Horizons for post-2015 Common Capital Flight Policies By Simplice Asongu
  79. Colonial Virginia’s Paper Money Regime, 1755-1774: a Forensic Accounting Reconstruction of the Data By Farley Grubb
  80. Long-run priors for term structure models By Meldrum, Andrew; Roberts-Sklar, Matt
  81. The Option Value of Human Capital: Higher Education and Wage Inequality By Sang Yoon Lee; Yongseok Shin; Donghoon Lee
  82. Dynamic Directed Random Matching By Darrell Duffie; Lei Qiao; Yeneng Sun
  83. Declining Wealth and Work Among Male Veterans in the Health and Retirement Study By Alan L. Gustman; Thomas L. Steinmeier; Nahid Tabatabai
  84. Robert Lucas and the Twist of Modeling Methodology. On some Econometric Methods and Problems in New Classical Macroeconomics By Francesco Sergi
  85. Wealth Distribution and Social Mobility in the US: A Quantitative Approach By Jess Benhabib; Alberto Bisin; Mi Luo
  86. Inference on Multivariate Heteroscedastic Time Varying Random Coefficient Models By Liudas Giraitis; George Kapetanios; Tony Yates
  87. Applying Thirlwall’s Law to the Portuguese economy: a sectoral analysis By Jeanete Dias; Micaela Antunes
  88. A global factor in variance risk premia and local bond pricing By Kaminska, Iryna; Roberts-Sklar, Matt
  89. Regulation and Market Liquidity By Francesco Trebbi; Kairong Xiao
  90. The International Monetary Fund: 70 Years of Reinvention By Carmen M. Reinhart; Christoph Trebesch
  91. Business Cycle Dynamics and Firm Heterogeneity. Evidence for Austria Using Survey Data By Jürgen Bierbaumer-Polly; Werner Hölzl

  1. By: Olivier Blanchard; Eugenio Cerutti; Lawrence Summers
    Abstract: We explore two issues triggered by the crisis. First, in most advanced countries, output remains far below the pre-recession trend, suggesting hysteresis. Second, while inflation has decreased, it has decreased less than anticipated, suggesting a breakdown of the relation between inflation and activity. To examine the first, we look at 122 recessions over the past 50 years in 23 countries. We find that a high proportion of them have been followed by lower output or even lower growth. To examine the second, we estimate a Phillips curve relation over the past 50 years for 20 countries. We find that the effect of unemployment on inflation, for given expected inflation, decreased until the early 1990s, but has remained roughly stable since then. We draw implications of our findings for monetary policy.
    JEL: E31 E32 E50
    Date: 2015–11
  2. By: Ryan Banerjee; Michael B. Devereux; Giovanni Lombardo
    Abstract: This paper explores the nature of macroeconomic spillovers from advanced economies to emerging market economies (EMEs) and the consequences for independent use of monetary policy in EMEs. We first empirically document the effects of US monetary policy shocks on a sample group of EMEs. A contractionary monetary shock leads a retrenchment in EME capital flows, a fall in EME GDP, and an exchange rate depreciation. We construct a the- oretical model which can help to account for these findings. In the model, macroeconomic spillovers are exacerbated by financial frictions. We assess the extent to which domestic monetary policy can mitigate the negative spillovers from foreign shocks. Absent financial frictions, international spillovers are minor, and an inflation targeting rule represents an ef- fective policy for the EME. With frictions in financial intermediation, however, spillovers are substantially magnified, and an inflation targeting rule has little advantage over an exchange rate peg. However, an optimal monetary policy markedly improves on the performance of naive inflation targeting or an exchange rate peg. Furthermore, optimal policies don’t need to be coordinated across countries. Under the specific set of assumptions maintained in our model, a non-cooperative, self-oriented optimal policy gives results very similar to those of a global cooperative optimal policy.
    JEL: E3 E5 F3 F5 G1
    Date: 2015–11
  3. By: Guillaume Rocheteau; Pierre-Olivier Weill; Tsz-Nga Wong
    Abstract: We construct a tractable model of monetary exchange with search and bargaining that features a non- degenerate distribution of money holdings in which one can study the short-run and long-run effects of changes in the money supply. While money is neutral in the long run, a one-time money injection in a centralized market with flexible prices generates an increase in aggregate real balances in the short run, a decrease in the rate of return of money, and a redistribution of consumption levels across agents. The price level in the short run varies in a non-monotonic fashion with the size of the money injection, e.g., small injections can lead to short-run deflation while large injections generate inflation. We extend our model to include employment risk and show that repeated money injections can raise output and welfare when unemployment is high.
    JEL: E0 E4 E52
    Date: 2015–12
  4. By: Sydney C. Ludvigson; Sai Ma; Serena Ng
    Abstract: Uncertainty about the future rises in recessions. But is uncertainty a source of business cycle fluctuations or an endogenous response to them, and does the type of uncertainty matter? Answer: sharply higher uncertainty about real economic activity in recessions is fully an endogenous response to other shocks that cause business cycle fluctuations, while uncertainty about financial markets is a likely source of the fluctuations. Financial market uncertainty has quantitatively large negative consequences for several measures of real activity including employment, production, and orders. Such are the main conclusions drawn from estimation of three-variable structural vector autoregressions. To establish causal effects, we use information contained in external instruments that we construct in a novel way to be valid under credible interpretations of the structural shocks.
    JEL: E00 E32 E44 G01 G12
    Date: 2015–12
  5. By: Michael T. Belongia; Peter N. Ireland
    Abstract: More than fifty years ago, Friedman and Schwartz examined historical data for the United States and found evidence of pro-cyclical movements in the money stock, which led corresponding movements in output. We find similar correlations in more recent data; these appear most clearly when Divisia monetary aggregates are used in place of the Federal Reserve’s official, simple-sum measures. When we use information in Divisia money to estimate a structural vector autoregression, identified monetary policy shocks appear to have large and persistent effects on output and prices, with a lag that has lengthened considerably since the early 1980s.
    JEL: E31 E32 E51 E52
    Date: 2015–12
  6. By: Michael B. Devereux; Eric R. Young; Changhua Yu
    Abstract: The dangers of high capital flow volatility and sudden stops have led economists to promote the use of capital controls as an addition to monetary policy in emerging market economies. This paper studies the benefits of capital controls and monetary policy in an open economy with financial frictions, nominal rigidities, and sudden stops. We focus on a time-consistent policy equilibrium. We find that during a crisis, an optimal monetary policy should sharply diverge from price stability. Without commitment, policymakers will also tax capital inflows in a crisis. But this is not optimal from an ex-ante social welfare perspective. An outcome without capital inflow taxes, using optimal monetary policy alone to respond to crises, is superior in welfare terms, but not time-consistent. If policy commitment were in place, capital inflows would be subsidized during crises. We also show that an optimal policy will never involve macro-prudential capital inflow taxes as a precaution against the risk of future crises (whether or not commitment is available).
    JEL: E44 E58 F41
    Date: 2015–12
  7. By: Matteo Cacciatore; Romain Duval; Giuseppe Fiori; Fabio Ghironi
    Abstract: This paper explores the effects of labor and product market reforms in a New Keynesian, small open economy model with labor market frictions and endogenous producer entry. We show that it takes time for reforms to pay off, typically at least a couple of years. This is partly because the benefits materialize through firm entry and increased hiring, both of which are gradual processes, while any reform-driven layoffs are immediate. Some reforms—such as reductions in employment protection—increase unemployment temporarily. Implementing a broad package of labor and product market reforms minimizes transition costs. Importantly, reforms do not have noticeable deflationary effects, suggesting that the inability of monetary policy to deliver large interest rate cuts in their aftermath—either because of the zero bound on policy rates or because of membership in a monetary union—may not be a relevant obstacle to reform. Alternative simple monetary policy rules do not have a large effect on transition costs.
    JEL: E24 E32 E52 F41 J64 L51
    Date: 2015–12
  8. By: Evelyne Dourille-Feer
    Abstract: Prime Minister Shinzo Abe’s pro-growth economic policy, dubbed Abenomics, combines monetary policy and fiscal policy as well as growth reforms. It has attracted much attention worldwide because it combines short and mid to long term policies, and supply and demand programmes. The quest for growth is explained by its ballooning public debt and the increasing social cost of its fast population aging. Exiting deflation has been prioritized by Shinzo Abe to energize growth. Abenomics raises the central question of why the quest for growth in a context of shrinking population and a quite high standard of living? However, this eagerness for growth, which translates into higher fiscal revenues, is explained by its ballooning public debt, and the increasing social cost of its fast population aging. The Abe government has set the ambitious goal of an annual 2% real GDP growth rate. The first two arrows (expansionary monetary and fiscal policies) were successful in 2013. But, in the 2014 fiscal year, the coincidence of a VAT increase, a steep fall in energy prices and a smaller supplementary budget generally drove down the CPI index (excluding consumption tax) and led to zero growth of real GDP and, in the 2015 fiscal year, the developments of CPI and growth were disappointing. In order not to fall back into deflation, demand must be boosted. Shinzo Abe is betting on institutional and technological innovations to foster economic growth in the long run. Abenomics will work its magic if Shinzo Abe has sufficient time and sufficient political strength to fully implement his third policy arrow.
    Keywords: Growth;Macroeconomic policy;Deflation;innovation
    JEL: O40 E61 E31 O38
    Date: 2015–12
  9. By: Liudas Giraitis (Queen Mary University of London); George Kapetanios (Queen Mary University of London); Konstantinos Theodoridis (Bank of England); Tony Yates (University of Bristol and Centre for Macroeconomics)
    Abstract: Following Giraitis, Kapetanios, and Yates (2014b), this paper uses kernel methods to estimate a seven variable time-varying (TV) vector autoregressive (VAR) model on the data set constructed by Smets and Wouters (2007). We apply an indirect inference method to map from this TV VAR to time variation in implied Dynamic Stochastic General Equilibrium (DSGE) parameters. We find that many parameters change substantially, particularly those defining nominal rigidities, habits and investment adjustment costs. In contrast to the 'Great Moderation' literature our monetary policy parameter estimates suggest that authorities tried to deliver a low and stable inflation from 1975 onwards, however, the severe adverse supply shocks in the 70s could have caused these policies to fail.
    Keywords: DSGE, Structural change, Kernel estimation, Time-varying VAR, Monetary policy shocks
    JEL: E52 E61 E66 C14 C18
    Date: 2015–12
  10. By: Michele Fratianni (Indiana University, Kelly School of Business, Bloomington US, Univ. Plitecnica Marche and MoFiR); Federico Giri (Universit… Politecnica delle Marche, Dipartimento di Scienze economiche e sociali)
    Abstract: The great depression of 1929 and the great financial crisis of 2008 have been the two big events of the last 75 years. Not only have they produced serious economic consequences but they also changed our view of economics and policymaking. The aim of this work is to compare these two great crises and highlight similarities as well as differences. Monetary policy, the exchange rate system and the role of the banks are our fields of investigation. Our findings are that two big events have more similarities than dissimilarities.
    Keywords: Eurozone, Great Depression, Great Financial Crisis, gold standard, money multiplier, shadow banking
    JEL: E31 E42 E5 G21
    Date: 2015–12
  11. By: Eric T. Swanson
    Abstract: I adapt the methods of Gurkaynak, Sack, and Swanson (2005) to estimate two dimensions of monetary policy during the 2009-2015 zero lower bound period in the U.S. I show that, after a suitable rotation, these two dimensions can be interpreted as "forward guidance" and "large-scale asset purchases" (LSAPs). I estimate the sizes of the forward guidance and LSAP components of each FOMC announcement between January 2009 and June 2015, and show that those estimates correspond closely to identifiable features of major FOMC announcements over that period. Forward guidance has relatively small effects on the longest-maturity Treasury yields and essentially no effect on corporate bond yields, while LSAPs have large effects on those yields but essentially no effect on short-term Treasuries. Both types of policies have significant effects on medium-term Treasury yields, stock prices, and exchange rates.
    JEL: E44 E52 E58
    Date: 2015–12
  12. By: David Berger; Joseph Vavra
    Abstract: We use microdata underlying U.S. consumer, producer and import price indices to document how the distribution of price changes evolves over time. Two striking features characterize pricing at each stage of production: 1) Frequency is countercyclical. 2) Frequency is correlated with variance. Conversely, other statistics which have received recent attention, like kurtosis, do not exhibit uniform patterns across our datasets. What implications do our empirical results have for monetary policy? Using a flexible accounting framework which collapses the high-dimensional distribution of price changes into a single measure of aggregate price flexibility, we show that flexibility is highly variable and countercyclical.
    JEL: E3 E31 E32 E5 E52 L16
    Date: 2015–11
  13. By: Francesco Nucci (Sapienza Universita' di Roma); Marianna Riggi (Bank of Italy)
    Abstract: The fall in the US labor force participation during the Great Recession stands in sharp contrast with its parallel increase in the euro area. In addition to structural forces, cyclical factors are also shown to account for these patterns, with the participation rate being procyclical in the US since the inception of the crisis and countercyclical in the euro area. We rationalize these diverging developments by using a general equilibrium business cycle model, which nests the endogenous participation decisions into a search and matching framework. We show that the "added worker" e¤ect might outweigh the "discouragement effect" if real wage rigidities are allowed for and/or habit in consumers.preferences is sufficiently strong. We then draw the implications of variable labor force participation for inflation and establish the following result: if endogenous movements in labor market participation are envisaged, then the degree of real wage rigidities becomes almost irrelevant for price dynamics. Indeed, during recessions, the upward pressures on in.ation stemming from the lack of downward adjustment of real wages are offset by an opposite influence from the additional looseness in the labor market, due to the higher participation associated with wage rigidities.
    Keywords: Labor Force Participation, Wage Rigidities, Inflation
    JEL: J21 J30 E31
    Date: 2015–12
  14. By: Michael D. Bordo; Pierre L. Siklos
    Abstract: A new measure of credibility is constructed as a function of the differential between observed inflation and some estimate of the inflation rate that the central bank targets. The target is assumed to be met flexibly. Credibility is calculated for a large group of both advanced and emerging countries from 1980 to 2014. Financial crises reduce central bank credibility and central banks with strong institutional determinants tend to do better when hit by a shock of the magnitude of the 2007-2008 financial crisis. The VIX, adopting an inflation target and central bank transparency, are the most common determinants of credibility. Similarly, real economic growth has a significant influence on central bank credibility even in inflation targeting economies. Hence, responding to real economic factors is necessarily detrimental to central bank credibility. Nevertheless, caution is in order about whether monetary authorities should take on broader responsibilities for the financial performance of economies.
    JEL: C31 E31 E58
    Date: 2015–11
  15. By: Ahmet Benlialper (Department of Economics, İpek University, Ankara, Turkey; Department of Economics, Middle East Technical University, Ankara, Turkey); Hasan Cömert (Department of Economics, Middle East Technical University, Ankara, Turkey)
    Abstract: This study aims to evaluate the developments in Turkish monetary policy after 2002 and understand the constraints on the effectiveness of the Central Bank of the Republic of Turkey (CBRT). The CBRT has significantly altered its monetary policy in response to the crisis. It became much more experimental and aware of challenges it faced. However, the Bank’s ability to exert influence on key variables seems to have been restrained by factors outside of its control. Financial flows exert great influence on key macroeconomic variables that the Bank monitors closely. Furthermore, energy prices are among the key determinants of inflation in Turkey. As a result, the Bank’s influence on growth and inflation through intermediate variables became a daunting task. The magnitude and direction of flows seem to be mainly related to global risk perception determining the worldwide liquidity conditions rather than to domestic factors. Under these conditions central banks may not set their official interest rates independent of interest rates in advanced countries. Indeed, our VAR analysis exercise supports this argument for the Turkish case. Existing policy framework would not produce desired outcomes unless the sources of the problems such as financial flows as the main global constraints on monetary policy are addressed in a much more serious manner.
    Keywords: Central banking, Economic and financial crisis, Capital inflows, the Turkish economy
    JEL: E52 G01 F31 F32 O53
    Date: 2015–12
  16. By: Nikolaos Antonakakis (University of Portsmouth, Department of Economics and Finance, Portsmouth Business School, Portland Street, Portsmouth, PO1 3DE, United Kingdom; Webster Vienna Private University, Department of Business and Management, Praterstrasse 23, 1020, Vienna, Austria; Johannes Kepler University, Department of Economics, Altenberger Strasse 69, 4040 Linz-Auhof, Austria.); Rangan Gupta (Department of Economics, University of Pretoria); Aviral K. Tiwari (Faculty of Management, IBS Hyderabad, IFHE University, Donthanapally Shankarapalli Road, Hyderabad, Andhra Pradesh 501203, India)
    Abstract: In this study, we examine the time-varying correlations between output and prices, while controlling for the impact of monetary policy stance, and output and in flation uncertainties over the period of 1800-2014. The results of the empirical analysis reveal that dynamic correlations of output and prices were typically negative, suggesting a countercyclical behaviour of prices, apart from the early 1840s, and from the beginning till the mid of the 20th century wherein correlation were positive, indicating the procyclicality of prices. A historical decomposition analysis based on a sign-restricted structural vector autoregressive model is able to relate the procyclical and countercyclical behavior to the predominance of aggregate supply, and aggregate demand and/or monetary policy shocks, respectively. Moreover, infl ation uncertainty (monetary policy stance) was found to have a positive (negative) effect on in ation over the last 215 years.
    Keywords: Conditional correlation, GARCH, Price-Output Comovement, US Economy
    JEL: E3 C5
    Date: 2015–11
  17. By: Alessia Paccagnini
    Abstract: We study the relation between the macroeconomic variables and the term structure of interest rates during the Great Moderation. We interpolate a term structure using three latent factors of the yield curve to analyze the responses of all maturities to macroeconomic shocks. A Nelson–Siegel model is implemented to estimate the latent factors which correspond to the level, the slope, and the curvature of the curve. As policy implication, the interpolated term structure informs the policymaker how all the macroeconomic shocks impact the whole term structure, even if the impact has a different magnitude across maturities.
    Keywords: Term structure of interest rates; Yield curve; VAR; Factor model
    JEL: G12 E43 E44 E58
    Date: 2016–01
  18. By: Engelbert Stockhammer (Kingston University)
    Abstract: The Bhaduri-Marglin model has become a widely used workhorse model in heterodox macroeconomics and it has given rise to a dozen or so empirical studies, which at times have given conflicting results. Neo-Kaleckians and neo-Goodwinians have applied different estimation strategies, with the former typically estimating behavioural equations, while the latter have often used reduced-form demand equations. Further differences include the lag structure, the output measure, the control variables and the sample. The paper, firstly, tries to clarify the terms of the debate. While neo-Kaleckians interpret the model as medium-term, partial-equilibrium goods market model, neo-Goodwinians are interested in the interaction of demand and distribution and regard the model as a long-run model with short-run cycles. Second, we elaborate a Kalecki-Minsky view of the economy as characterised by a wage-led demand regime and cycles driven by financial fragility. Many of the reported results may suffer from omitted variable bias as they do not include financial control variables. At least in the recent past, financial effects on demand have been much larger in size than distribution effects. A wage-led Minsky model with reserve army distribution function gives rise to pseudo-Goodwin cycles.
    Keywords: wage-led growth, Bhaduri-Marglin model, Post Keynesian Economics, Minsky cycles
    JEL: B50 E11 E12 E20
    Date: 2015–12
  19. By: Julian Kozlowski; Laura Veldkamp; Venky Venkateswaran
    Abstract: The “Great Recession” was a deep downturn with long-lasting effects on credit markets, labor markets and output. We explore a simple explanation: This recession has been more persistent than others because it was perceived as an extremely unlikely event before 2007. Observing such an episode led all agents to re-assess macro risk, in particular, the probability of tail events. Since changes in beliefs endure long after the event itself has passed and through its effects on prices and choices, it produces long-lasting effects on borrowing, investment, employment and output. To model this idea, we study a production economy with debt-financed firms. Agents use standard econometric tools to estimate the distribution of aggregate shocks. When they observe a new shock, they re-estimate the distribution from which it was drawn. Even transitory shocks have persistent effects because, once observed, they stay forever in the agents’ data set. We feed a time-series of US macro data into our model and show that our belief revision mechanism can explain the 12% downward shift in US trend output.
    JEL: D84 E32
    Date: 2015–11
  20. By: Mikhail Golosov; Guido Menzio
    Abstract: We propose a new business cycle theory. Firms need to randomize over firing or keeping workers who have performed poorly in the past, in order to give them an ex-ante incentive to exert effort. Firms have an incentive to coordinate the outcome of their randomizations, as coordination allows them to load the firing probability on states of the world in which it is costlier for workers to become unemployed and, hence, allows them to reduce overall agency costs. In the unique robust equilibrium, firms use a sunspot to coordinate the randomization outcomes and the economy experiences endogenous, stochastic aggregate fluctuations.
    JEL: D86 E24 E32
    Date: 2015–11
  21. By: Benjamin M. Friedman
    Abstract: Keynes’s “Grandchildren” essay famously predicted both a rapid increase in productivity and a sharp shrinkage of the workweek – to fifteen hours – over the century from 1930. Keynes was right (so far) about output per capita, but wrong about the workweek. The key reason is that he failed to allow for changing distribution. With widening inequality, median income (and therefore the income of most families) has risen, and is now rising, much more slowly than he anticipated. The failure of the workweek to shrink as he predicted follows. Other factors, including habit formation, socially induced consumption preferences, and network effects are part of the story too. Combining the analysis of Keynes, Meade and Galbraith suggests a way forward for economic policy under the prevailing circumstances.
    JEL: E21 E24
    Date: 2015–11
  22. By: Saten Kumar; Hassan Afrouzi; Olivier Coibion; Yuriy Gorodnichenko
    Abstract: We study the (lack of) anchoring of inflation expectations in New Zealand using a new survey of firms. Managers of these firms display little anchoring of inflation expectations, despite twenty-five years of inflation targeting by the Reserve Bank of New Zealand, a fact which we document along a number of dimensions. Managers are unaware of the identities of central bankers as well as central banks’ objectives, and are generally poorly informed about recent inflation dynamics. Their forecasts of future inflation reflect high levels of uncertainty and are extremely dispersed as well as volatile at both short and long-run horizons. Similar results can be found in the U.S. using currently available surveys as shown in Binder (2015).
    JEL: E3 E4 E5
    Date: 2015–12
  23. By: Rangan Gupta (Department of Economics, University of Pretoria); Eric Olson (College of Business and Economics, West Virginia University, Morgantown, WV 26506, USA.); Mark E. Wohar (College of Business Administration, University of Nebraska at Omaha, 6708 Pine Street, Omaha, NE 68182, USA, and School of Business and Economics, Loughborough University, Leicestershire, LE11 3TU, UK.)
    Abstract: In this paper, we first extract 8 factors from a monthly data set of 130 macroeconomic and financial variables. Then these extracted factors are used to construct a Factor-Augmented Qualitative VAR (FA-Qual VAR) model to forecast industrial production growth, inflation, the Federal funds rate and the term spread based on a pseudo real-time recursive forecasting exercise over an out-of-sample period of 1980:1-2014:12, using an in-sample period of 1960:1-1979:12. Short-, medium- and long-run horizons of one-, six, twelve- and twenty-four-month(s)-ahead are considered. The forecasts from the FA-Qual VAR is compared with that of a standard VAR model (comprising of output, prices, interest rate and the term spread), and that of a Qualitative VAR (Qual VAR) model (which includes the variables in the VAR and the latent business cycle index generated based on the information from the industrial production growth, inflation, the Federal Funds rate and the term spread). In general, we observe that the FA-QualVAR tends to perform significantly better than the VAR and Qual VAR for the one-month-ahead and six-months-ahead forecast horizons for the key US variables under consideration. In other words, adding information from a large data set (through the use of factors) tend to produce forecasting gains at short- to medium-run horizons.
    Keywords: Vector Autoregressions, Business Cycle Turning Points, Factors, Forecasting
    JEL: C32 C53 E37 E47
    Date: 2015–11
  24. By: Herrenbrueck, Lucas; Geromichalos, Athanasios
    Abstract: Assets have “indirect liquidity” if they cannot be used as media of exchange, but can be traded to obtain a medium of exchange (money) and thereby inherit monetary properties. This essay describes a simple dynamic model of indirect asset liquidity, provides closed form solutions for real and nominal assets, and discusses properties of the solutions. Some of these are standard: assets are imperfect substitutes, asset demand curves slope down, and money is not always neutral. Other properties are more surprising: prices are flexible but appear sticky, and an increase in the supply of indirectly liquid assets can decrease welfare. Because of its simplicity, the model can be useful as a building block inside a larger model, and for teaching concepts from monetary theory.
    Keywords: monetary-search models, asset liquidity, asset prices, monetary policy
    JEL: E41 E51 E52 G12
    Date: 2015–12–23
  25. By: Silvia Miranda-Agrippino; Hélène Rey
    Abstract: We find that one global factor explains an important part of the variance of a large cross section of returns of risky assets around the world. Using a model with heterogeneous investors, we interpret the global factor as reflecting aggregate realised variance and the time-varying degree of market-wide risk aversion. A medium-scale Bayesian VAR allows us to analyse the workings of the “Global Financial Cycle”, i.e. the interaction between US monetary policy, real activity and global financial variables such as credit spreads, cross-border credit flows, bank leverage and the global factor in asset prices. We find evidence of large monetary policy spillovers from the US to the rest of the world.
    JEL: E44 E58 F33 F42 G15
    Date: 2015–11
  26. By: Liliana Varela (University of Houston)
    Abstract: Interest rate shocks have a large impact on economic activities in emerging markets. This paper shows that this finding can be associated with credit market imperfections affecting principally non-tradable activities. Using a new database on credit and output at sector level, I present novel evidence documenting that tradable and non-tradable activities respond asymmetrically to changes in credit conditions in emerging markets. In particular, I show that local credit conditions explain a significant proportion of the variation in output growth in non-tradable activities, but little of the variation in output growth in tradable activities. Accordingly, interest rate shocks are amplified solely through non-tradable activities. Importantly, these distinctive features of emerging markets are absent in developed small open economies. To rationalize these findings, I introduce a simple small open economy model in which tradable and non-tradable sectors differ in their access to external finance. The model demonstrates that credit market imperfections can reverse the predictions of the standard small open economy model, in which interest rate shocks affect the capital-intensive tradable sector most. In presence of financial frictions, these shocks affect the labor-intensive non-tradable sector more.
    Keywords: financial frictions, interest rate shocks, emerging markets
    JEL: E44 F34 F41 F43
    Date: 2015–12–14
  27. By: Jonathan Eaton; Samuel S. Kortum; Brent Neiman
    Abstract: Obstfeld and Rogoff (2001) propose that trade frictions lie behind key puzzles in international macroeconomics. We take a dynamic multicountry model of international trade, production, and investment to data from 19 countries to assess this proposition quantitatively. Using the framework developed in Eaton, Kortum, Neiman, and Romalis (2015), we revisit the puzzles in a counterfactual with drastically lower trade frictions. Our results largely support Obstfeld and Rogoff's explanation. Most notably, with lower trade frictions, domestic investment becomes much less correlated with domestic saving, mitigating the Feldstein-Horioka (1980) puzzle. Nominal GDP becomes less variable while real GDP becomes much more closely tied to nominal GDP, mitigating the purchasing power parity and exchange rate disconnect puzzles. Lower trade frictions don't help resolve all of the puzzles, however. The correlation of consumption growth across countries, if anything, diminishes.
    JEL: E3 F17 F4
    Date: 2015–12
  28. By: Jan Tore Klovland (Norwegian School of Economics and Norges Bank)
    Abstract: This paper presents new indices for industrial production in Norway covering the years 1896-1948. Separate annual and monthly indices of gross output and labour productivity are computed for 45 manufacturing and mining industries, using annually updated weights based on value added at factor cost. The new industrial production index shows somewhat stronger growth of output in the years before WWI and, in particular, in the 1930s, than the existing index published by Statistics Norway. The new monthly data set also provides a basis for identifying a business cycle chronology for Norway in the first half of the twentieth century.
    Keywords: Industrial production, business cycles, labour productivity
    JEL: E32 N64 O47
    Date: 2015–12–08
  29. By: Paolo Brunori (University of Bari); Flaviana Palmisano (University of Luxembourg); Vito Peragine (University of Bari)
    Abstract: In the last decades inequality of opportunity has been extensively studied by economists, on the assumption that, in addition to being normatively undesirable, it can be related to low potential for growth. In this paper we evaluate inequality of opportunity in 11 Sub-Saharan Africa countries. According to our results, the portion of total inequality which can be attributed to exogenous circumstances is between 30% and 40% for the generality of countries considered. We also find a positive association between total consumption inequality and inequality of opportunity and we study the di?erent sources of unequal opportunities. Finally, we address a number of methodological issues that typically arise when measuring inequality of opportunity with imperfect data, which is the typical case in developing countries.
    Keywords: Consumption inequality, Equality of opportunity, Sub-Saharan Africa
    JEL: D63 E24 O15 O40
    Date: 2015–12
  30. By: Dudin, Mikhail (Russian Presidential Academy of National Economy and Public Administration); Sekerin, Vladimir (Moscow state university of mechanical engineering); Smirnova, Olga (The Council for the study of productive forces under Ministry of Economic Development of the Russia Fedration and the Russian Academy of Sciences (SOPS)); Frolova, Evgenia (Far Eastern Federal University); Sepiashvili, Ekaterina (Moscow State University of Technology and Management)
    Abstract: The article examines topical issues related to the formation of an effective monetary policy as an element to ensure stability of the banking sector under the conditions of the economic crisis. During the research, the following basic conclusions were drawn. The nature and content of the state anti-crisis management in the banking sector is considered, taking into account current and future changes in the global development of the world economy. The state anti-crisis management in the banking sector should be primarily focused on the control and minimization of the key risks of sustainable national socio-economic development. This is achieved through the systematic use of the monetary policy instruments. Instruments for banking sector regulation are systematized with due consideration of the monetary policy targeting. The choice of instruments for regulating the banking sector, as a rule, is discretionary, thus, the state, represented by bodies of power, when forming approaches to the implementation of effective monetary and macroprudential policies, aimed at ensuring the stability of the banking sector during the economic crisis, should take into account the investment and innovative character of the real economy sector development, as well as social and legal relations in society. Through the buildup of sustainable socio-economic development, as well as the systematization of the regulatory treatment of the banking sector on the basis of monetary policy optimization, author proposes to further improve the development of financial systems of the state as a whole, and the banking sector in particular on the basis of the triple helix model (universities-state-business).In relation to the banking sector, adaptation of the triple helix model means reforming the tripartite institutional interaction by replacement of the real sector with the banking sector, and the public sector – with central bank and the macroprudential oversight bodies.
    Keywords: banking sector, economic crisis, systemic banking crisis, anti-crisis public management, monetary policy, macroprudential regulation, the triple helix model
    JEL: E52 H12
    Date: 2014
  31. By: Eric M. Leeper
    Abstract: Dramatic fiscal developments in the wake of the 2008 financial crisis and global recession led researchers to recognize how little we know about fiscal policies and their impacts. This essay argues that fiscal analysis that aims to address pertinent issues and provide useful inputs to policymakers is intrinsically hard. I illustrate this with examples torn from the economic headlines in many countries. I identify some essential ingredients for useful fiscal analysis and point to examples in the literature that integrate some of those ingredients. Recent methodological advances give reason to be optimistic about fiscal analyses in the future.
    JEL: E52 E61 E62 E63
    Date: 2015–12
  32. By: Mehmet Balcilar (Department of Economics, Eastern Mediterranean University, Turkey and Department of Economics, University of Pretoria); Rangan Gupta (Department of Economics, University of Pretoria); Mampho P. Modise (Department of Economics, University of Pretoria); John W. Muteba Mwamba (Department of Economics and Econometrics, University of Johannesburg)
    Abstract: This paper analyses whether we can predict South African excess stock returns based on a measure of economic policy uncertainty (EPU) of South Africa and twenty other developed and emerging markets. In this regard, we use a Bayesian graphical model estimated over the sample period of 1998:01-2012:12. The model is also estimated in a rolling-window fashion over the monthly sample period of 2003:01-2012:03, using an initial sample period of 1998:01-2002:12. The Bayesian shrinkage approach allows us to simultaneously model the 21 EPUs, over and above 22 other standard financial and macroeconomic predictors. In addition, the Bayesian graphical model also provides both instantaneous and lagged relationships between the predictors and the equity premium. Our full sample results show that, in terms of instantaneous relationship, none of the EPUs play any role, and for the lagged relationship, only the EPU of Hong Kong and the Netherlands can be considered as important with posterior inclusion probabilities in excess of 0.50. Rolling estimates show that instantaneous relationships are quite constant and do not indicate any significant links from EPUs to the equity premium. On the other hand, rolling estimates are highly time-varying, and there is significant lagged impact from most of the EPUs in various sub-periods.
    Keywords: Economic Policy Uncertainty, Stock Prices, Prediction, Bayesian Graphical Models, Vector Autoregression, South Africa
    JEL: C32 C53 E60 G12 G17
    Date: 2015–12
  33. By: Ana Beatriz Galvão (University of Warwick); Liudas Giraitis (Queen Mary University of London); George Kapetanios (Queen Mary University of London); Katerina Petrova (Queen Mary University of London)
    Abstract: We build a time varying DSGE model with financial frictions in order to evaluate changes in the responses of the macroeconomy to financial friction shocks. Using US data, we find that the transmission of the financial friction shock to economic variables, such as output growth, has not changed in the last 30 years. The volatility of the financial friction shock, however, has changed, so that output responses to a one-standard deviation shock increase twofold in the 2007-2011 period in comparison with the 1985-2006 period. The time varying DSGE model with financial frictions improves the accuracy of forecasts of output growth and inflation during the tranquil period of 2000-2006, while delivering similar performance to the fixed coefficient DSGE model for the 2007-2012 period.
    Keywords: DSGE models, Financial frictions, Local likelihood, Bayesian methods, Time varying parameters
    JEL: C11 C53 E27 E52
    Date: 2015–12
  34. By: Tatsuro Senga (Queen Mary University of London)
    Abstract: Uncertainty faced by individual firms appears to be heterogeneous. In this paper, I construct new empirical measures of firm-level uncertainty using data from the I/B/E/S and Compustat. These new measures reveal persistent differences in the degree of uncertainty facing individual firms not reflected by existing measures. Consistent with existing measures, I find that the average level of uncertainty across firms is countercyclical, and that it rose sharply at the start of the Great Recession. I next develop a heterogeneous firm model with Bayesian learning and uncertainty shocks to study the aggregate implications of my new empirical findings. My model establishes a close link between the rise in firms' uncertainty at the start of a recession and the slow pace of subsequent recovery. These results are obtained in an environment that embeds Jovanovic's (1982) model of learning in a setting where each firm gradually learns about its own productivity, and each occasionally experiences a shock forcing it to start learning afresh. Firms differ in their information; more informed firms have lower posterior variances in beliefs. An uncertainty shock is a rise in the probability that any given firm will lose its information. When calibrated to reproduce the level and cyclicality of my leading measure of firm-level uncertainty, the model generates a prolonged recession followed by anemic recovery in response to an uncertainty shock. When confronted with a rise in firm-level uncertainty consistent with advent of the Great Recession, it explains 79 percent of the observed decline in GDP and 89 percent of the fall in investment.
    Keywords: Uncertainty, Learning, Misallocation and business cycles
    JEL: E22 E32 D8 D92
    Date: 2015–12
  35. By: Mariacristina De Nardi; Giulio Fella; Fang Yang
    Abstract: Piketty's book, Capital in the Twenty-First Century, discusses several factors affecting wealth inequality: rates of return on capital, output growth rates, tax progressivity, top income shares, and heterogeneity in saving rates and inheritances. This paper studies the role of various forces affecting savings in quantitative models of wealth inequality, discusses their successes and failures in accounting for the observed facts, and compares these model's implications with Piketty's conclusions.
    JEL: D14 E21 H2
    Date: 2015–11
  36. By: Vasco Cúrdia; Michael Woodford
    Abstract: We extend the basic (representative-household) New Keynesian [NK] model of the monetary transmission mechanism to allow for a spread between the interest rate available to savers and borrowers, that can vary for either exogenous or endogenous reasons. We find that the mere existence of a positive average spread makes little quantitative difference for the predicted effects of particular policies. Variation in spreads over time is of greater significance, with consequences both for the equilibrium relation between the policy rate and aggregate expenditure and for the relation between real activity and inflation. Nonetheless, we find that the target criterion—a linear relation that should be maintained between the inflation rate and changes in the output gap—that characterizes optimal policy in the basic NK model continues to provide a good approximation to optimal policy, even in the presence of variations in credit spreads. Such a "flexible inflation target" can be implemented by a central-bank reaction function that is similar to a forward-looking Taylor rule, but adjusted for changes in current and expected future credit spreads.
    JEL: E44 E52
    Date: 2015–12
  37. By: Simplice Asongu (Yaoundé/Cameroun); Vanessa Tchamyou (Yaoundé/Cameroun)
    Abstract: To the best our knowledge, in the first empirical macroeconomic examination of the nexus between financial intermediation and mobile phones, Asongu employs two conflicting financial system definitions in the assessment of how mobile phones have stimulated financial development in Africa. Within the framework of the dominant International Monetary Fund’s International Financial Statistics (2008) definition, mobile phones are established to be negatively associated with financial intermediary dynamics of depth, activity and size. Conversely, when the previously neglected informal financial sector is integrated into the conception, definition and measurement of the financial system, mobile phones are positively (negatively) correlated with the informal (formal) financial intermediation sector. The empirical evidence is based on 52 African countries. Causality in the established linkages has been confirmed in subsequent studies by the same author. At least three policy implications derive from the findings. First, the role of informal financial intermediation is increasing to the detriment of formal financial mechanisms. Second, in order to capture the positive effect of mobile phones on finance, it is imperative to integrate the missing informal financial sector component into the IMF definition of the financial system. Third, it is a wake-up call for more scholarly research on: (i) macroeconomic financial development implications of mobile phone penetration and (ii) monetary policy instruments in the face of burgeoning ‘mobile phone’-oriented financial intermediation.
    Keywords: Banking; Mobile Phones; Shadow Economy; Financial Development; Africa
    JEL: E00 G20 L96 O17 O33
    Date: 2015–08
  38. By: Leo Krippner
    Abstract: Shadow Short Rates (SSRs) estimated from shadow/lower-bound term structure models (SLMs) can be useful for monitoring of the stance of unconventional monetary policy and for quantitative analysis, but only if they are relatively robust. I show from several perspectives that SSRs from three-factor SLMs, which includes Wu and Xia (2015) SSRs, are not robust, and how that arises from the inherent flexibility of three-factor SLMs. Such SSRs should therefore be avoided. However, I also show that estimated SSRs from two-factor SLMs are relatively robust. Hence, two-factor SLM SSRs appear to be good candidates for monitoring and quantitative analysis, but ideally with appropriate robustness checks including alternative monetary policy metrics.
    Keywords: Shadow Short Rates, zero lower bound, unconventional monetary policy, term structure models
    JEL: E43 G12 G13
    Date: 2015–12
  39. By: Catherine Mathieu (OFCE); Henri Sterdyniak (OFCE)
    Abstract: The concepts of potential output level and growth survived the 2008 crisis and are still widely used in economic policy debates. The paperdiscusses thetheoretical foundations and empirical assessments of these concepts. Potential output may refer to different concepts, depending on the constraints taken into account. Potential output cannot be assessed without a complex macroeconomic analysis.The paper discusses recent empirical work on potential growth estimates,especially how they introduce a break in potential growth after the 2008 crisis, and how the methods used oftenjustify procyclical policies. For the future,the problem isnot a slowdown in potential growth butthe inability of developed economies,underglobalisation constraints, to reach afull-employment growth.
    Keywords: potential growth; euro area governance
    JEL: E63 O47
    Date: 2015–12
  40. By: Stephen Hansen (Departament d'Economia i Empresa (Department of Economics and Business) Universitat Pompeu Fabra (Pompeu Fabra University) Barcelona Graduate School of Economics (Barcelona GSE)); Michael McMahon (Department of Economics University of Warwick; Centre for Macroeconomics (CFM))
    Abstract: We explore how the multi-dimensional aspects of information released by the FOMC has effects on both market and real economic variables. Using tools from computational linguistics, we measure the information released by the FOMC on the state of economic conditions, as well as the guidance the FOMC provides about future monetary policy decisions. Employing these measures within a FAVAR framework, we find that shocks to forward guidance are more important than the FOMC communication of current economic conditions in terms of their effects on market and real variables. Nonetheless, neither communication has particularly strong effects on real economic variables.
    Keywords: Monetary policy, communications, Vector Autoregression
    JEL: E53 E58
    Date: 2015–12
  41. By: Bonner, Clemens (Tilburg University, Center For Economic Research)
    Abstract: The purpose of this paper is to analyze the impact of preferential regulatory treatment on banks’ demand for government bonds. Using unique transaction-level data, our analysis suggests that preferential treatment in microprudential liquidity and capital regulation significantly increases banks’ demand for government bonds. Liquidity and capital regulation also seem to incentivize banks to substitute other bonds with government bonds. We also find evidence that this "regulatory effect" leads banks to reduce lending to the real economy.
    Keywords: government bonds; financial markets; regulation; liquidity; capital allocation
    JEL: G18 G21 E42
    Date: 2015
  42. By: Alberto Alesina; Andrea Passalacqua
    Abstract: This paper critically reviews the literature which explains why and under which circumstances governments accumulate more debt than it would be consistent with optimal fiscal policy. We also discuss numerical rules or institutional designs which might lead to a moderation of these distortions.
    JEL: E62
    Date: 2015–12
  43. By: Chu, Angus C.; Cozzi, Guido; Furukawa, Yuichi
    Abstract: This study explores the macroeconomic effects of labor unions in a two-country R&D-based growth model in which the market size of each country determines the incentives for innovation. We find that an increase in the bargaining power of a wage-oriented union leads to a decrease in employment in the domestic economy. This result has two important implications on innovation. First, it reduces the rates of innovation and economic growth. Second, it causes innovation to be directed to the foreign economy, which in turn causes a negative effect on domestic wages relative to foreign wages in the long run. We also derive welfare implications and calibrate our model to data in the US and the UK to quantify the effects of labor unions on social welfare and wage inequality across countries. Our calibrated model is able to explain about half of the decrease in relative wage between the US and the UK from 1980 to 2007. Furthermore, the decrease in unions' bargaining power leads to quantitatively significant welfare gains in the two countries.
    Keywords: economic growth; R&D; labor unions; wage inequality
    JEL: E24 J51 O30 O43
    Date: 2015–12
  44. By: Claudiu T. Albulescu (Management Department, Politehnica University of Timisoara, Romania); Aviral Kumar Twari (Faculty of Management, IBS Hyderabad, IFHE University, India); Stephen M. Miller (Department of Economics, University of Nevada, USA.); Rangan Gupta (Department of Economics, University of Pretoria)
    Abstract: We provide new evidence on the relationship between inflation and its uncertainty in the U.S. on an historical basis, covering the period 1775-2014. First, we use a bounded approach for measuring inflation uncertainty, as proposed by Chan et al. (2013), and we compare the results with the Stock and Watson (2007) method. Second, we employ the wavelet methodology to analyze the co-movements and causal effects between the two series. Our results provide evidence of a relationship between inflation and its uncertainty that varies across time and frequency. First, we show that in the medium- and long-runs, the Freidman–Ball hypothesis holds when the measure of uncertainty is unbounded, while if the opposite applies, the Cukierman–Meltzer reasoning prevails. Second, we discover mixed evidence about the inflation–uncertainty nexus in the short-run, findings which explain the mixed results reported to date in the empirical literature.
    Keywords: historical inflation rate, uncertainty, continuous wavelet transform, bounded series, U.S.
    JEL: C22 E31 N11 N12
    Date: 2015–12
  45. By: Ahlborn, Markus; Schweickert, Rainer
    Abstract: Most studies on the relationship between public debt and economic growth implicity assume homegenous debt effects across their samples. We - in accordance with recent literature - challenge this view and state that there likely is a great deal of cross-country heterogeneity in that relationship. However, other than scholars assuming that all countries are different, we expect that clusters of countries differ. We identify three country clusters with distinct economic systems: Liberal (Anglo Saxon), Continental (Core EU members) and Nordic (Scandinacian). We argue that different degrees of fiscal uncertainty at comparable levels of public debt between those economic systems constitute a major source of hetergeneity in the debt-growth relationship. Our empirical evidence supports this assumption. Continental countries face more growth reducing public debt effects than especially Liberal countries. There, public debt apparently exerts neutral or even positive growth effects, whil for Nordic countries a non-linear relationship is discovered, with negative debt effects kicking in at public debt values of around 60% of GDP.
    Keywords: Public Debt,Economic Growth,Economic Systems,Fiscal Policy,Welfare State
    JEL: E62 P10 P51 H10
    Date: 2015
  46. By: Ana Beatriz Galvão (University of Warwick); Liudas Giraitis (Queen Mary University of London); George Kapetanios (Queen Mary University of London); Katerina Petrova (Queen Mary University of London)
    Abstract: DSGE models have recently received considerable attention in macroeconomic analysis and forecasting. They are usually estimated using Bayesian methods, which require the computation of the likelihood function under the assumption that the parameters of the model remain fixed throughout the sample. This paper presents a Local Bayesian Likelihood method suitable for estimation of DSGE models that can accommodate time variation in all parameters of the model. There are two advantages in allowing the parameters to vary over time. The first is that it enables us to assess the possibilities of regime changes, caused by shifts in the policy preferences or the volatility of shocks, as well as the possibility of misspecification in the design of DSGE models. The second advantage is that we can compute predictive densities based on the most recent parameters' values that could provide us with more accurate forecasts. The novel Bayesian Local Likelihood method applied to the Smets and Wouters (2007) model provides evidence of time variation in the policy parameters of the model as well as the volatility of the shocks. We also show that allowing for time variation improves considerably density forecasts in comparison to the fixed parameter model and we interpret this result as evidence for the presence of stochastic volatility in the structural shocks.
    Keywords: DSGE models, Local likelihood, Bayesian methods, Time varying parameters
    JEL: C11 C53 E27 E52
    Date: 2015–12
  47. By: Farley Grubb
    Abstract: I use denominational structure (the spacing and size of monetary units) to explain how the Continental Congress attempted to manage a successful common currency when sub-national political entities were allowed to have separate currencies and run independent monetary policies. Congress created a common currency that was too large to use in ordinary transactions. Congress hoped this currency would be held for post-war redemption and would not circulate as money during the war. As such, it would not contribute to wartime inflation. By contrast, individual state currencies were emitted in small enough denominations to function as the domestic medium of exchange.
    JEL: E42 E52 H77 N11
    Date: 2015–11
  48. By: Rudolf Alvise Lennkh (European Stability Mechanism); Florian Walch (European Central Bank)
    Abstract: Transaction cost shocks in financial markets are known to affect asset prices. This paper analyses how changes in transaction costs may affect the value of assets that banks use to collateralise borrowings in monetary policy operations. Based on a simple asset pricing model and employing a dataset of hypothetical Eurosystem collateral positions, we simulate and quantify the resulting change in collateral value pledged by counterparties to the Eurosystem, resulting from a transaction cost shock. A 10 basis point increase in transaction costs entails a direct -0.30% decrease of collateral value and a -0.07% decrease when adjusted for the expected reduction in the number of trades of each asset. We conclude that banks will on average suffer small collateral losses while selected institutions could face a considerably larger collateral decrease.
    Keywords: Transaction cost, collateral, central bank, monetary policy
    JEL: C15 E59 G12
    Date: 2015–11
  49. By: Stelios D. Bekiros; Alessia Paccagnini
    Abstract: Advanced Bayesian methods are employed in estimating dynamic stochastic general equilibrium (DSGE) models. Although policymakers and practitioners are particularly interested in DSGE models, these are typically too stylized to be taken directly to the data and often yield weak prediction results. Hybrid models can deal with some of the DSGE model misspecifications. Major advances in Bayesian estimation methodology could allow these models to outperform well-known time series models and effectively deal with more complex real-world problems as richer sources of data become available. A comparative evaluation of the out-of-sample predictive performance of many different specifications of estimated DSGE models and various classes of VAR models is performed, using datasets from the US economy. Simple and hybrid DSGE models are implemented, such as DSGE–VAR and Factor Augmented DSGEs and tested against standard, Bayesian and Factor Augmented VARs. Moreover, small scale models including the real gross domestic product, the harmonized consumer price index and the nominal short-term federal funds interest rate, are comparatively assessed against medium scale models featuring additionally sticky nominal prices, wage contracts, habit formation, variable capital utilization and investment adjustment costs. The investigated period spans 1960:Q4–2010:Q4 and forecasts are produced for the out-of-sample testing period 1997:Q1–2010:Q4. This comparative validation can be useful to monetary policy analysis and macro-forecasting with the use of advanced Bayesian methods.
    Keywords: Bayesian estimation; Forecasting; Metropolis–Hastings; Markov Chain Monte Carlo; Marginal data density; Factor augmented DSGE
    Date: 2014–03
  50. By: Thomas Nellen
    Abstract: This paper analyses the liquidity management game played in payment systems with free but collateralised intraday credit facilities, under the assumption that settlement risk is the driving force. Settlement equilibria are found to depend on the combination of the intraday liquidity facilities' design and the collateral policy applied by the central bank. The effectiveness of a two-part tariff in coordinating on early settlement depends on the same factors. Model predictions are consistent with stylised facts from a comparison of settlement behaviour in the Swiss Interbank Clearing and Fedwire funds.
    Keywords: real-time gross settlement, large-value payment systems, intraday liquidity facility, collateralisation, settlement risk
    JEL: E58 G21 G28
    Date: 2015
  51. By: Carola Frydman; Dimitris Papanikolaou
    Abstract: We develop a general equilibrium model that delivers realistic fluctuations in both the level as well as the dispersion in executive pay as a result of changes in the technology frontier. Our model recognizes that executives add value to the firm not only by participating in production decisions, but also by identifying new investment opportunities. The economic value of these two distinct components of the executive's job varies with the state of the economy. Improvements in technology that are specific to new vintages of capital raise the skill price of discovering new growth prospects -- and thus raise the compensation of executives relative to workers. If most of the dispersion in managerial skill lies in the ability to find new projects, dispersion in executive pay will also rise. Our model delivers testable predictions about the relation between executive pay and growth opportunities that are quantitatively consistent with the data.
    JEL: E22 G10 G30 J24 J3 M52
    Date: 2015–12
  52. By: Jed Armstrong (Reserve Bank of New Zealand)
    Abstract: The output gap is a key concept in monetary policy, reflecting pressures on resources in the economy. However, it is unobservable, and so must be estimated. This paper outlines a suite of indicators used by the Reserve Bank of New Zealand to inform estimates of the output gap. The paper discusses the real-time properties of the suite of indicators, and uses two metrics to evaluate the performance of each indicator. The best-performing indicators of the output gap are those based on labour market variables, but the difference in performance between the indicators is small enough that the entire suite should be considered.
    Date: 2015–12
  53. By: Lorenz Kueng
    Abstract: Using new transaction data I show that consumption is excessively sensitive to large, predetermined, regular, and salient payments from the Alaska Permanent Fund, with a large average marginal propensity to consume (MPC) of 30% for nondurables and services and 70% for total expenditures. This deviation from the standard inter-temporal consumption model is concentrated among households for whom the loss from failing to smooth consumption is small in terms of equivalent variation. In particular, the MPC is increasing in household income but decreasing in the size of the loss. As a result, statistically significant excess sensitivity in response to these large payments is consistent with households following near-rational alternative consumption plans. For macroeconomic policies, such as an economic stimulus program, these near-rational alternatives might be the more relevant behavior than the standard consumption model.
    JEL: D12 D14 D91 E21 H31
    Date: 2015–12
  54. By: Feige, Edgar L.
    Abstract: This paper reviews the meaning and measurement of unobserved economies germane to tax evasion and macroeconomic information systems. These include the unreported, non-observed, underground, illegal, informal and unrecorded economies. It reviews the progress and shortcomings of national and international agency efforts to measure these unobserved economies, noting what they have in common, what distinguishes one from another and their interconnections. It then examines the meaning of Professor Schneider’s Shadow Economy (SSE), and the veracity of his claim to have accurately estimated its size and trend worldwide by employing a MIMIC model methodology. It concludes that SSE estimates suffer from conceptual flaws, apparent manipulation of results and insufficient documentation for replication, questioning their place in the academic, policy and popular literature.
    Keywords: Tax evasion, shadow economy, non-observed, underground, illegal, informal, unrecorded, MIMIC, cash, National Income and Product Accounts, Schneider.
    JEL: C51 C82 E26 E41 H26 K42 O17
    Date: 2015–12–20
  55. By: Mario Tonveronachi
    Abstract: Mario Tonveronachi, University of Siena, builds on his earlier proposal (The ECB and the Single European Financial Market) to advance financial market integration in Europe through the creation of a single benchmark yield curve based on debt certificates (DCs) issued by the European Central Bank (ECB). In this policy brief, Tonveronachi discusses potential changes to the ECB's operations and their implications for member-state fiscal rules. He argues that his DC proposal would maintain debt discipline while mitigating the restrictive, counterproductive fiscal stance required today, simultaneously expanding national fiscal space while ensuring debt sustainability under the Maastricht limits, and offering a path out of the self-defeating policy regime currently in place.
    Date: 2015–11
  56. By: Hansen, Stephen (Universitat Pompeu Fabra and GSE); McMahon, Michael (IMF-STI, University of Warwick, CEPR, CAGE (Warwick), CfM (LSE), and CAMA (ANU))
    Abstract: We explore how the multi-dimensional aspects of information released by the FOMC has effects on both market and real economic variables. Using tools from computational linguistics, we measure the information released by the FOMC on the state of economic conditions, as well as the guidance the FOMC provides about future monetary policy decisions. Employing these measures within a FAVAR framework, we find that shocks to forward guidance are more important than the FOMC communication of current economic conditions in terms of their effects on market and real variables. Nonetheless, neither communication has particularly strong effects on real economic variables.
    Keywords: Monetary policy; communication; Vector Autoregression. JEL Classification: E52, E58
    Date: 2015
  57. By: Forsfält, Tomas (National Institute of Economic Research); Glans, Erik (National Institute of Economic Research)
    Abstract: The present paper introduces a new version of an input-output model of the Swedish economy (IOR). The model is used at NIER for short term forecasts of imports and sectoral production. It is also used for structural analysis of the Swedish economy. The economy is divided into about 30 products/industries and about 40 final demand categories. For each demand category, it is possible to trace back the supply provided by value added of different industries, including trade margins and merchanting trade, public sector production, imports, taxes and subsidies. This paper presents calculated supply shares for the main components of final demand for the year 2012. An adjustment for the tourist consumption in Sweden is made in such a way that the supply share for household consumption is valid for Swedish households, and the supply shares for exports includes exports to incoming tourists.
    Keywords: Input-output; forecasting and simulation; import shares
    JEL: C67 D57 E17
    Date: 2015–12–14
  58. By: Pooyan Amir Ahmadi; Harald Uhlig
    Abstract: We propose a novel identification strategy of imposing sign restrictions directly on the impulse responses of a large set of variables in a Bayesian factor-augmented vector autoregression. We conceptualize and formalize conditions under which every additional sign restriction imposed can be qualified as either relevant or irrelevant for structural identification up to a limiting case of point identification. Deriving exact conditions we establish that, (i) in a two dimensional factor model only two out of potentially infinite sign restrictions are relevant and (ii) in contrast, in cases of higher dimension every additional sign restriction can be relevant improving structural identification. The latter result can render our approach a blessing in high dimensions. In an empirical application for the US economy we identify monetary policy shocks imposing conventional wisdom and find modest real effects avoiding various unreasonable responses specifically present and pronounced combining standard recursive identification with FAVARs.
    JEL: C22 E5
    Date: 2015–11
  59. By: Andrés Camilo ÁLVAREZ-ESPINOSA; Daniel Alejandro ORDOÑEZ; Alejandro NIETO; William WILLS; German ROMERO; Silvia Liliana CALDERÓN
    Abstract: Este documento presenta el análisis de los impactos económicos que tendría la implementación de las medidas de mitigación de gases de efecto invernadero que hacen parte del compromiso de Colombia de reducir sus emisiones en un 20% con respecto a las emisiones proyectadas para el año 2030. La ejecución de las medidas que contribuyan al cumplimiento del compromiso adquirido traerá consigo un aumento del PIB de 2,3% en el 2040, equivalente a un aumento en la tasa de crecimiento del PIB de 0,15% anual para el periodo 2020- 2040, frente a un escenario de no hacer nada. Otra consecuencia es que, en el largo plazo, se reduce la tasa de desempleo debido a que se generarán empleos directos en el uso y capacitación de las nuevas formas de producción, e indirectos en el suministro de insumos, servicios, industria. Las inversiones requeridas por las medidas de mitigación son aplicadas a sectores intensivos en trabajo, como lo es el transporte y el sector agropecuario. Debido a la estructura económica y la matriz de emisiones, la implementación de medidas asociadas a la eficiencia energética en el sector de transporte, industrial, y residencial generarían los mayores impactos positivos sobre el crecimiento económico.
    Keywords: Acuerdo de París, mitigación, cambio climático, modelo deequilibrio general.
    JEL: Q54 E17
    Date: 2015–12–16
  60. By: Pablo D. Fajgelbaum; Eduardo Morales; Juan Carlos Suárez Serrato; Owen M. Zidar
    Abstract: We study state taxes as a potential source of spatial misallocation in the United States. We build a spatial general-equilibrium model in which the distribution of workers, firms, and trade flows across states responds to state taxes and public-service provision. We estimate firm and worker mobility elasticities and preferences for public services using data on the distribution of economic activity and state taxes from 1980 to 2010. A revenue-neutral tax harmonization leads to aggregate real-GDP and welfare gains of 0.7%. Tax cuts by individual states lower own-state tax revenues and economic activity, and generate cross-state spillovers depending on trade linkages.
    JEL: E6 F12 H71 R13
    Date: 2015–11
  61. By: George J. Hall; Thomas J. Sargent
    Abstract: Congress first imposed an aggregate debt limit in 1939 when it delegated decisions about designing US debt instruments to the Treasury. Before World War I, Congress designed each bond and specified a maximum amount of each bond that the Treasury could issue. It usually specified purposes for which proceeds could be spent. We construct and interpret a Federal debt limit before 1939.
    JEL: E6 H6 N21 N41
    Date: 2015–12
  62. By: Tolga Omay (Department of Management, Türk Hava Kurumu THK University, Bahçekapi Mahallesi Okul Sokak No:11, Ankara, Turkey); Rangan Gupta (Department of Economics, University of Pretoria); Giovanni Bonaccolto (Department of Statistical Sciences, University of Padova, via C. Battisti 241, 35121 Padova, Italy)
    Abstract: This paper applies the Fractional Frequency Flexible Fourier Form (FFFFF) Dickey-Fuller (DF)-type unit root test on the natural logarithm of US real GNP over the quarterly period of 1875:1-2015:2, to determine whether the same is trend- or difference-stationary. While, standard and Integer Frequency Flexible Fourier Form (IFFFF) DF-type test fails to reject the null of unit root, the relatively more powerful FFFFF DF-type test provides strong evidence of the real GNP as being trend-stationary, i.e., US output returns to a deterministic log-nonlinear trend in the long run.
    Keywords: Fractional Frequency Flexible Fourier Form, Structural Break, Unit root, US real GNP
    JEL: C12 C22 E23
    Date: 2015–11
  63. By: Mehmet Balcilar (Department of Economics, Eastern Mediterranean University, Turkey and Department of Economics, University of Pretoria, South Africa.); Rangan Gupta (Department of Economics, University of Pretoria); Christian Pierdzioch (Department of Economics, Helmut Schmidt University, Germany)
    Abstract: Much significant research has been done to study the links between gold returns and the returns of other asset classes in times of economic crisis and high uncertainty. We contribute to this research by using a novel nonparametric causality-in-quantiles test to study how measures of policy and equity-market uncertainty affect gold-price returns and volatility.
    Keywords: Gold returns, Gold volatility, Causality, Uncertainty
    JEL: C32 C53 E60 Q02
    Date: 2015–12
  64. By: Rasmus Lentz; Nicolas Roys
    Abstract: The paper studies human capital accumulation over workers' careers in an on the job search setting with heterogenous firms. In renegotiation proof employment contracts, more productive firms provide more training. Both general and specific training induce higher wages within jobs, and with future employers, even conditional on the future employer type. Because matches do not internalize the specific capital loss from employer changes, specific human capital can be over-accumulated, more so in low type firms. While validating the Acemoglu and Pischke (1999) mechanisms, the analysis nevertheless arrives at the opposite conclusion: That increased labor market friction reduces training in equilibrium.
    JEL: D21 D43 D83 E24 J24 J31 J33 J41 J62 J63 J64
    Date: 2015–11
  65. By: Markus P.A. Schneider; Stephen Kinsella; Antoine Godin
    Abstract: We examine the relationship between changes in a country's public sector fiscal position and inequality at the top and bottom of the income distribution during the age of austerity (2006-13). We use a parametric Lorenz curve model and Gini-like indices of inequality as our measures to assess distributional changes. Based on the EU's Statistics on Income and Living Conditions SLIC and International Monetary Fund data for 12 European countries, we find that more severe adjustments to the cyclically adjusted primary balance (i.e., more austerity) are associated with a more unequal distribution of income driven by rising inequality at the top. The data also weakly suggest a decrease in inequality at the bottom. The distributional impact of austerity measures reflects the reliance on regressive policies, and likely produces increased incentives for rent seeking while reducing incentives for workers to increase productivity.
    Keywords: Inequality; Austerity; Europe; Fiscal Policy; Lorenz Curve
    JEL: D31 D63 E62 E65 H6
    Date: 2015–12
  66. By: Yellen, Janet L. (Board of Governors of the Federal Reserve System (U.S.))
    Date: 2015–12–02
  67. By: Olivier CARDI; Romain RESTOUT
    Date: 2015
  68. By: George Kudrna; Chung Tran
    Keywords: Fiscal De?cifit, Public Debt, Fiscal Consolidation, Welfare, Over-lapping Generations, Dynamic General Equilibrium
    JEL: C68 E21 E63 H55 J26 J45
    Date: 2015–12
  69. By: Ryan A. Decker; John Haltiwanger; Ron S. Jarmin; Javier Miranda
    Abstract: The pace of business dynamism and entrepreneurship in the U.S. has declined over recent decades. We show that the character of that decline changed around 2000. Since 2000 the decline in dynamism and entrepreneurship has been accompanied by a decline in high-growth young firms. Prior research has shown that the sustained contribution of business startups to job creation stems from a relatively small fraction of high-growth young firms. The presence of these high-growth young firms contributes to a highly (positively) skewed firm growth rate distribution. In 1999, a firm at the 90th percentile of the employment growth rate distribution grew about 31 percent faster than the median firm. Moreover, the 90-50 differential was 16 percent larger than the 50-10 differential reflecting the positive skewness of the employment growth rate distribution. We show that the shape of the firm employment growth distribution changes substantially in the post-2000 period. By 2007, the 90-50 differential was only 4 percent larger than the 50-10, and it continued to exhibit a trend decline through 2011. The reflects a sharp drop in the 90th percentile of the growth rate distribution accounted for by the declining share of young firms and the declining propensity for young firms to be high-growth firms.
    JEL: E24 J63 L26
    Date: 2015–12
  70. By: Farhidi, Faraz
    Abstract: Having studied the ancient empires, achieving political and economic powers, have been hovered one of the most critical issues all the time for the nations. The strategies to secure those might be different, but the intension still stays the same: controlling the labor and capital markets. Reviewing the historical colonization, one would recognize that there is a significant correlation between the political power and economic power within the countries. Among all the explanations on the approaches to attain these ambitions, using conquest other nations to gain resources and new territory and labor force seems to be one the unfortunate motives in this discussion. In the current study, having analyzed the macro data, I claim the feasibility of a positive causal relationship between having wars abroad and government expenditure in the long run within the studied period in the United States. While in the investigated duration, war seems to have a positive effect on the personal consumptions and the negative one on the export of goods and services, as well as private investments in the short run, as a consequence.
    Keywords: US Economy, War, Causal relation, Macro elements
    JEL: C20 E20 H56 N42 O41
    Date: 2015–09
  71. By: Agustín S. Bénétrix (Department of Economics, Trinity College Dublin); Philip R. Lane (Central Bank of Ireland, Trinity College Dublin and CEPR)
    Abstract: There is an extensive literature on the behaviour of fiscal variables vis-a-vis the output cycle. We show that fiscal variables also co-vary with the financial cycle, as captured by fluctuations in the current account balance and credit growth. These financial factors affect fiscal outcomes, over and above their influence on the output cycle. We argue that fiscal surveillance and the design of fiscal rules should pay close attention to the interaction between the financial cycle and the fiscal cycle.
    Date: 2015–12
  72. By: Omar Licandro
    Abstract: This paper integrates firm dynamics theory into the Neoclassical growth framework. It embeds selection into an otherwise standard dynamic general equilibrium model of one good, two production factors (capital and labor) and competitive markets. Selection relies on firm specific investment: i) capital is a fixed production factor {an entry cost, ii) the productivity of capital is firm specific, but observed after investment, iii) firm specific capital is partially reversible {its opportunity cost plays the same role as fixed production costs. At equilibrium, aggregate technology is Neoclassical, but TFP is endogenous and positively related to selection; capital depreciation positively depends on selection too, due to capital irreversibility. The Neoclassical model is the limit case of homogeneous firms. At steady state, output per capita and welfare both raise with selection. Rendering capital more reversible or increasing the variance of the idiosyncratic shock both raise selection, productivity, output per capita and welfare.
    Keywords: Firm dynamics, Selection, Neoclassical Growth model, Scrapping, Capital irreversibility
    Date: 2015
  73. By: Jorge Duran; Omar Licandro
    Abstract: National Income and Product Accounts (NIPA) measure real output growth by means of a Fisher ideal chain index. Bridging modern macroeconomics and the economic theory of index numbers, this paper shows that output growth as measured by NIPA is welfare based. In a dynamic general equilibrium model with genreral recursive preferences and technology, welfare depends on present and future consumption. Indeed, the associated Bellman equation provides a representation of preferences in the domain of current consumption and current investment. Applying standard index number theory to this representation of preferences shows that the Fisher-Shell true quantity index is equal to the Divisia index, in turn well approximated by the Fisher ideal index used in NIPA.
    Keywords: Growth measurement, Quantity indexes, NIPA, Fisher-Shell index, Embodied technical change.
    Date: 2015
  74. By: Guido Matías Cortés (University of Manchester); Manuel Hidalgo-Pérez (U. Pablo de Olavide)
    Abstract: Changes in within-group wage inequality are often interpreted as reflecting changes in returns to unobservable skills. This interpretation relies on the highly restrictive assumption that the variance of skills within groups remains constant over time. We propose and implement a new identification strategy which relaxes this assumption using longi- tudinal data. Results based on matched CPS data for 1982-2012 show strong evidence of increases in the dispersion of unobserved skills, par- ticularly among college graduates. Contrary to the conclusion drawn when constant within-group skill variance is assumed, our results sug- gest that the return to skills decreased during the 1980s and early 1990s.
    Keywords: Return to skills; Within-group wage inequality
    JEL: J31 J24 E24
    Date: 2015–12
  75. By: Mario Tonveronachi
    Abstract: Until market participants across the euro area face a single risk-free yield curve rather than a diverse collection of quasi-risk-free sovereign rates, financial market integration will not be complete. Unfortunately, the institution that would normally provide the requisite benchmark asset--a federal treasury issuing risk-free debt--does not exist in the euro area, and there are daunting political obstacles to creating such an institution. There is, however, another way forward. The financial instrument that could provide the foundation for a single market already exists on the balance sheet of the European Central Bank (ECB): legally, the ECB could issue "debt certificates" (DCs) across the maturity spectrum and in sufficient amounts to create a yield curve. Moreover, reforming ECB operations along these lines may hold the key to addressing another of the euro area's critical dysfunctions. Under current conditions, the Maastricht Treaty's fiscal rules create a vicious cycle by contributing to a deflationary economic environment, which slows the process of debt adjustment, requiring further deflationary budget tightening. By changing national debt dynamics and thereby enabling a revision of the fiscal rules, the DC proposal could short-circuit this cycle of futility.
    Date: 2015–12
  76. By: Danne, Christian
    Abstract: VARsignR identifies structural shocks in Vector Autoregressions (VARs) using sign restrictions. It implements Uhlig’s (2005) rejection method, Uhlig’s (2005) penalty function approach, the Rubio-Ramirez et al. (2010) rejection method, and Fry and Pagan’s (2011) median target method. This vignette shows the usage and provides some technical information on the procedures that should help users to bridge the gap between VARsignR and the underlying technical papers.
    Keywords: Sign restrictions, vector autoregression, Bayesian.
    JEL: C32 C8 C87 E52
    Date: 2015–12–18
  77. By: Mehmet Balcilar (Eastern Mediterranean University, Turkey and University of Pretoria, South Africa); Rangan Gupta (Department of Economics, University of Pretoria); Won Joong Kim (Department of Economics, Konkuk University, Seoul, Republic of Korea.); Clement Kyei (Department of Economics, University of Pretoria)
    Abstract: This paper analyses whether we can predict stock return and its volatility of Hong Kong, Malaysia and South Korea based on measures of domestic and global (China, the European Area, Japan, and the US) economic policy uncertainties (EPU). While, linear Granger causality tests fail to find evidence of predictability, barring the case of South Korean EPU predicting its own stock returns, when we use a nonparametric causality-in-quantiles test, strong evidence of causality is detected from the EPUs for stock return volatility of Malaysia, and both returns and volatility at certain parts of the conditional distributions for South Korea. There is no evidence of predictability from domestic and global EPUs for return and volatility of the Hong Kong stock market. Given the statistical evidence of nonlinearity in our data set, we consider the results from the nonparametric test as more robust relative to the standard linear causality test.
    Keywords: Economic Policy Uncertainty, Stock Returns, Volatility, Linear Causality, Nonparametric Quantile Causality, Emerging Markets
    JEL: C32 C53 E60 G12 G17
    Date: 2015–11
  78. By: Simplice Asongu (Yaoundé/Cameroun)
    Abstract: An April 2015 World Bank report on attainment of the Millennium Development Goal (MDG) extreme poverty target has revealed that extreme poverty has been decreasing in all regions of the world with the exception of sub-Saharan Africa (SSA), in spite of the sub-region enjoying more than two decades of growth resurgence. This study builds on a critic of Piketty’s ‘capital in the 21st century’ and recent methodological innovations on reverse Solow-Swan to review empirics on the adoption of common policy initiatives against a cause of extreme poverty in SSA: capital flight. The richness of the dataset enables the derivation of 14 fundamental characteristics of African capital flight based on income-levels, legal origins, natural resources, political stability, regional proximity and religious domination. The main finding reveals that regardless of fundamental characteristic, from a projection date of 2010, a genuine timeframe for harmonizing policies is between 2016 and 2023. In other words, the beginning of the psot-2015 agenda on sustainable development goals coincides with the timeframe for common capital flight policies.
    Keywords: Econometric modeling; Capital flight; Poverty; Africa
    JEL: C50 E62 F34 O19 O55
    Date: 2015–11
  79. By: Farley Grubb
    Abstract: I reconstruct the data on Virginia’s paper money regime using forensic accounting techniques. I correct the existing data on the amounts authorized and outstanding. In addition, I reconstruct yearly data on previously unknown aspects of Virginia’s paper money regime, including printings, net new emissions, redemptions and removals, denominational structures, expected tax revenues, and specie accumulating in the treasury for paper money redemption. These new data form the foundation for narratives written on the social, economic, and political history of Virginia, as well as for testing models of colonial paper money performance.
    JEL: C82 E51 N11
    Date: 2015–12
  80. By: Meldrum, Andrew (Bank of England); Roberts-Sklar, Matt (Bank of England)
    Abstract: Dynamic no-arbitrage term structure models are popular tools for decomposing bond yields into expectations of future short-term interest rates and term premia. But there is insufficient information in the time series of observed yields to estimate the unconditional mean of yields in maximally flexible models. This can result in implausibly low estimates of long-term expected future short-term interest rates, as well as considerable uncertainty around those estimates. This paper proposes a tractable Bayesian approach for incorporating prior information about the unconditional means of yields. We apply it to UK data and find that with reasonable priors it results in more plausible estimates of the long-run average of yields, lower estimates of term premia in long-term bonds and substantially reduced uncertainty around these decompositions in both affine and shadow rate term structure models.
    Keywords: Affine term structure model; shadow rate term structure model; Gibbs sampler
    JEL: C11 E43 G12
    Date: 2015–12–18
  81. By: Sang Yoon Lee; Yongseok Shin; Donghoon Lee
    Abstract: Going to college is a risky investment in human capital. However, we highlight two options inherently embedded in college education that mitigate this risk: (i) college students can quit without completing four-year degrees after learning about their post-graduation wages and (ii) college graduates can take jobs that do not require four-year degrees (i.e., underemployment). These options reduce the chances of falling in the lower end of the wage distribution as a college graduate, rendering standard mean-variance calculations misleading. We show that the interaction between these options and the rising wage dispersion, especially among college graduates, is key to understanding the muted response of college enrollment and graduation rates to the substantial increase in the college wage premium in the United States since 1980. Furthermore, we find that subsidies inducing marginal students to attend colleges will have a negligible net benefit: Such students are far more likely to drop out of college or become underemployed even with a four-year degree, implying only small wage gains from college education.
    JEL: E24 I24 J24
    Date: 2015–11
  82. By: Darrell Duffie; Lei Qiao; Yeneng Sun
    Abstract: We demonstrate the existence of a continuum of agents conducting directed random searches for counterparties, and characterize the implications. Our results provide the first probabilistic foundation for static and dynamic directed random search (including the matching function approach) that is commonly used in the search-based models of financial markets, monetary theory, and labor economics. The agents' types are shown to be independent discrete-time Markov processes that incorporate the effects of random mutation, random matching with match-induced type changes, and with the potential for enduring partnerships that may have randomly timed break-ups. The multi-period cross-sectional distribution of types is shown to be deterministic via the exact law of large numbers.
    JEL: C78 D83 E41 G12
    Date: 2015–11
  83. By: Alan L. Gustman; Thomas L. Steinmeier; Nahid Tabatabai
    Abstract: The composition, wealth and employment of male veterans and nonveterans are analyzed for four cohorts from the Health and Retirement Study, ages 51 to 56 in 1992, 1998, 2004 and 2010. Half of the men in the two oldest cohorts served in the military. Only 16 percent of the men in the youngest cohort, the only cohort subject to the All-Volunteer Military, served. One fifth to one third of the members of each cohort who served saw combat, mainly in Viet Nam and in the First Gulf War. Among those 51 to 56 in 1992, veterans were better educated, healthier, wealthier, and more likely to be working than nonveterans. By the 2010 cohort, 51 to 56 year old veterans had lost their educational advantage over nonveterans, were less healthy, less wealthy and less likely to be working. After standardizing in multiple regressions for the influence of major observable characteristics, for the original 1992 HRS cohort the wealth of veterans is no longer higher than the wealth of nonveterans. In contrast, the wealth of veterans from the youngest cohort, those 51 to 56 in 2010, remains about 10 to 13 percent below the wealth of nonveterans from that cohort. There also is a decline from older to younger cohorts of veterans compared to nonveterans in the probability of being not retired, of working more than 35 hours per week, and in the likelihood of holding a job for more than 10 years. Comparisons are made within the group of veterans by years of service, officer rank and other covariates.
    JEL: D31 E21 H55 J14 J26 J32 J45
    Date: 2015–11
  84. By: Francesco Sergi (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)
    Abstract: The purpose of this contribution to the epistemology and history of recent macroeconomics is to construct a clear understanding of econometric methods and problems in New Classical macroeconomics. Most historical work have focused so far on theoretical or policy implication aspects of this research program set in motion by Robert Lucas in the early seventies. On the contrary, the empirical and econometric works of New Classical macroeconomics have received little attention. I focus especially on the contributions gathered in Rational Expectations and Econometric Practice, edited in 1981 by Lucas and Thomas Sargent. The main claim of this article is that the publication of this book must be regarded as a turn in macroeconomics, that would bring macroeconometric modeling methodology closer to Lucas's conception of models. The analysis of the New Classical macroeconometrics through the Lucas methodology allow us to propose an original historical account of the methods presented in Rational Expectations and Econometric Practice, but also of the problems that flawed this approach.
    Abstract: L'objectif de cette contribution à l'épistémologie et à l'histoire de la pensée économique est de proposer une compréhension claire des méthodes et des problèmes économétriques de la nouvelle macroéconomie classique. La plupart des travaux historiques à ce sujet se sont focalisés sur les aspects théoriques ou sur les implications de politique économique de ce programme de recherche, lancé par Robert Lucas au début des années soixante-dix. En revanche, le travail empirique et économétrique de la nouvelle macroéconomie classique a reçu peu d'attention par les historiens. L'article s'intéresse plus particulièrement aux contributions rassemblées dans Rational Expectations and Econometric Practice, ouvrage collectif de 1981 dirigé par Lucas et Thomas Sargent. La principale thèse de l'article est que la publication de ce livre entérine un tournant dans la modélisation macroéconométrique, en étroite résonance avec la conception méthodologique de Lucas sur les modèles. L'analyse de la macroéconométrie des nouveaux classiques par le prisme de la méthodologie lucasienne nous permet de proposer une vision historique originale des méthodes présentées dans Rational Expectations and Econometric Practice, tout comme des problèmes qui ont entravé le développement de cette approche.
    Keywords: history of macroeconomics,macroeconometrics,modeling methodology,histoire de la macroéconomie,Lucas (Robert),Sargent (Thomas),macroéconométrie,méthodologie et modélisation
    Date: 2015–11
  85. By: Jess Benhabib; Alberto Bisin; Mi Luo
    Abstract: This paper attempts to quantitatively identify the factors that drive wealth dynamics in the U.S. and are consistent with its observed skewed cross-sectional distribution and social mobility. We concentrate on three critical factors: a skewed and persistent distribution of earnings, differential saving and bequest rates across wealth levels, and capital income risk. All of these factors are necessary for matching both distribution and mobility, with a distinct role in inducing wealth accumulation near the borrowing constraints, contributing to the thick top tail of wealth, and affecting upward and/or downward social mobility.
    JEL: E21
    Date: 2015–11
  86. By: Liudas Giraitis (Queen Mary University of London); George Kapetanios (Queen Mary University of London); Tony Yates (Unversity of Bristol)
    Abstract: In this paper we introduce the general setting of a multivariate time series autoregressive model with stochastic time-varying coefficients and time-varying conditional variance of the error process. This allows modeling VAR dynamics for non-stationary times series and estimation of time varying parameter processes by well-known rolling regression estimation techniques. We establish consistency, convergence rates and asymptotic normality for kernel estimators of the paths of coefficient processes and provide pointwise valid standard errors. The method is applied to a popular 7 variable data set to analyze evidence of time-variation in empirical objects of interest for the DSGE literature. The results of this paper serve as a starting point for further research on numerous open problems including establishing estimation results of time-varying parameters that are uniform in time <i>t</i>, constructing Bonferroni-type correction to the pointwise standard error bands and developing a valid test of the null hypothesis of no time variation.
    Keywords: Kernel estimation, Time-varying VAR, Structural change, Monetary policy shock
    JEL: C10 C14 E52 E61
    Date: 2015–12
  87. By: Jeanete Dias (University of Coimbra); Micaela Antunes (University of Coimbra Faculty of Economics / GEMF)
    Abstract: International trade is definitely one of the most relevant factors when considering the economic expansion of a small country like Portugal and as such, this work analyzes the impact that the Balance of Payments can have on economic growth. For that, we apply Thirlwall’s Law. In addition, following the international economic and financial crisis of 2008, that among others, led to a fall in Private Investment and Public and Private Consumption, this work aims at verifying whether international trade can contribute to growth. Moreover, we examine whether the production structure can influence national growth, by using Thirlwall’s Multi-Sectoral Law. Furthermore, the evolution of the main exporting and importing sectors is described for the period 1994-2013 and the import and export demand functions are estimated both at an aggregated and sectoral level, in order to obtain the income elasticities that allow the computation of the Balance-of-Payments equilibrium growth rate. The results show Thirlwall’s Law is not as accurate as usual, probably due to the peculiarity of the period of analysis. In addition, the multi-sectoral perspective proves to be a better approximation to the period’s effective growth rate.
    Keywords: Economic Growth, Income-elasticities, Thirlwall’s Law, Multi-sectoral Thirlwall’s Law
    JEL: E12 F31 F43
    Date: 2015–12
  88. By: Kaminska, Iryna (Bank of England); Roberts-Sklar, Matt (Bank of England)
    Abstract: In a world of interconnected financial markets it is plausible that risk appetite — an important factor in asset pricing — is determined globally. By constructing an estimate of variance risk premia (VRP) for UK, US and euro-area equity markets, we are able to estimate international variance risk premia and use them to construct a proxy for global risk aversion. The impact of this time-varying risk aversion proxy on bond risk premia is then analysed within an arbitrage-free term structure model of UK interest rates, where it is introduced explicitly as a pricing factor. By linking VRP to a stochastic discount factor, we find that the risk aversion factor has significantly affected UK government bond yields. The changes in the risk aversion factor have been particularly important in the period of the 2008–09 financial crisis, with medium maturity yields being affected the most.
    Keywords: Affine term structure models; option implied volatility; realized volatility; risk aversion; stochastic discount factor; variance risk premium; volatility forecasting
    JEL: C22 C52 E43 G12
    Date: 2015–12–21
  89. By: Francesco Trebbi; Kairong Xiao
    Abstract: The aftermath of the 2008-09 U.S. financial crisis has been characterized by regulatory intervention of unprecedented scale. Although the necessity of a realignment of incentives and constraints of financial markets participants became a shared posterior after the near collapse of the U.S. financial system, considerable doubts have been subsequently raised on the welfare consequences of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and its various subcomponents, such as the Volcker Rule. The possibility of permanently inhibiting the market making capacity of large banks, with dire consequences in terms of under-provision of market liquidity, has been repeatedly raised. This paper presents systematic evidence from four different estimation strategies of the absence of breakpoints in market liquidity for fixed-income asset classes and across multiple liquidity measures, with special attention given to the corporate bond market. The analysis is performed without imposing restrictions on the exact dating of breaks (i.e. allowing for anticipatory response or lagging reactions to regulation) and focusing both on levels and dynamic latent factors. We report both single breakpoint and multiple breakpoint tests and analyze the liquidity of corporate bonds matched to their main underwriters making markets on those assets. Post-crisis U.S. regulatory intervention does not appear to have produced structural deteriorations in market liquidity.
    JEL: E43 E52 E58 G18 G28
    Date: 2015–11
  90. By: Carmen M. Reinhart; Christoph Trebesch
    Abstract: A sketch of the International Monetary Fund’s 70-year history reveals an institution that has reinvented itself over time along multiple dimensions. This history is primarily consistent with a “demand driven” theory of institutional change, as the needs of its clients and the type of crisis changed substantially over time. Some deceptively “new” IMF activities are not entirely new. Before emerging market economies dominated IMF programs, advanced economies were its earliest (and largest) clients through the 1970s. While currency problems were the dominant trigger of IMF involvement in the earlier decades, banking crises and sovereign defaults became they key focus since the 1980s. Around this time, the IMF shifted from providing relatively brief (and comparatively modest) balance-of-payments support in the era of fixed exchange rates to coping with more chronic debt sustainability problems that emerged with force in the developing nations and now migrated to advanced ones. As a consequence, the IMF has engaged in “serial lending”, with programs often spanning decades. Moreover, the institution faces a growing risk of lending into insolvency, most widespread among low income countries in chronic arrears to the official sector, but most evident in the case of Greece since 2010. We conclude that these practices impair the IMF’s role as an international lender of last resort.
    JEL: E50 F33 F40 F55 G01 G15 G2 N0
    Date: 2015–12
  91. By: Jürgen Bierbaumer-Polly (WIFO); Werner Hölzl (WIFO)
    Abstract: We study the (macroeconomic) consistency of individual firm-level business tendency survey responses and take firm-level heterogeneity explicitly into account. Adding firm-level, industry- and region-specific structural characteristics allows controlling for additional microeconomic heterogeneity. The dataset we use are the business tendency survey micro data for Austrian manufacturing covering the time period 1996 to 2012. Our results show that firm-specific information embedded in the qualitative survey questions is relevant to understand aggregate business cycle dynamics. For example, the assessment of firms' order book levels, their current degree of capacity utilisation and their production expectations as well as obstacles in their production activities due to insufficient demand show evidence of a significant effect in explaining a firm's change in current production output. However, we do not find clear results with respect to firm size, nor do we find explanatory power of the industry affiliation of a firm and with respect to regional characteristics. We are able to identify heterogeneity in behaviour for cyclical up- and downswings as well as between large and small firms.
    Keywords: business cycle, business tendency surveys, firm-level expectations, ordered probit
    Date: 2016–12–16

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